UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 1997
Commission File Number: 0-17007
Republic First Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2486815
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
(Address of principal executive offices) (Zip code)
215-735-4422
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES X NO ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes
of common stock, as of the latest practicable date.
3,446,309 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of October 31, 1997
Page 1 of 34
Exhibit index appears on page 33
<PAGE>
Table of Contents
Page
Part I: Financial Information
Item 1: Financial Statements 3
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Part II: Other Information
Item 1: Legal Proceedings 33
Item 2: Changes in Securities 33
Item 3: Defaults Upon Senior Securities 33
Item 4: Submission of Matters to a Vote of Security Holders 33
Item 5: Other Information 33
Item 6: Exhibits and Reports on Form 8-K 33
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
3
<PAGE>
Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS: September 30, 1997 December 31, 1996
(unaudited)
<S> <C> <C>
Cash and due from banks $5,237,000 $7,716,000
Interest - bearing deposits with banks 2,058,000 665,000
Federal funds sold 0 7,115,000
------------ ------------
Total cash and cash equivalents 7,295,000 15,496,000
Securities available for sale, at fair value 3,162,000 5,900,000
Securities held to maturity, at amortized cost 97,952,000 75,054,000
Loans receivable, net 184,403,000 170,002,000
Premises and equipment, net 1,926,000 711,000
Real estate owned, net 1,944,000 295,000
Accrued income and other assets 6,484,000 6,337,000
------------ ------------
Total Assets $303,166,000 $273,795,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $33,961,000 $32,611,000
Demand - interest-bearing 8,233,000 10,181,000
Money market and savings 25,840,000 27,240,000
Time 152,947,000 150,800,000
Time over $100,000 26,923,000 29,227,000
------------ ------------
Total Deposits 247,904,000 250,059,000
Other Borrowings 27,346,000 0
Accrued expenses and other liabilities 6,435,000 5,365,000
------------ ------------
Total Liabilities 281,685,000 255,424,000
------------ ------------
Shareholders' Equity:
Common stock, par value $.01 per share; 20,000,000 shares authorized;shares
issued and outstanding 3,446,309 and 3,417,509 as of September 30, 1997
and December 31, 1996 respectively 34,000 34,000
Additional paid in capital 13,793,000 13,687,000
Retained earnings 7,651,000 4,647,000
Unrealized gain on securities available for sale, net of
deferred taxes 3,000 3,000
------------ ------------
Total Shareholders' Equity 21,481,000 18,371,000
------------ ------------
Total Liabilities and Shareholders' Equity $303,166,000 $273,795,000
============ ============
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE>
Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Periods Ended September 30,
(unaudited)
<TABLE>
<CAPTION>
Quarter to Date Year to Date
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $4,364,000 $3,693,000 $12,316,000 $8,245,000
Interest on federal funds sold 10,000 66,000 300,000 1,195,000
Interest on investments 1,565,000 1,213,000 4,192,000 2,462,000
----------- ----------- ----------- -----------
Total Interest Income 5,939,000 4,972,000 16,808,000 11,902,000
----------- ----------- ----------- -----------
Interest expense:
Demand - interest-bearing 49,000 50,000 159,000 82,000
Money market and savings 233,000 209,000 692,000 467,000
Time 2,285,000 1,960,000 6,373,000 4,908,000
Time over $100,000 390,000 398,000 1,214,000 1,193,000
Subordinated Debt 0 70,000 0 210,000
Other Borrowings 373,000 0 621,000 0
----------- ----------- ----------- -----------
Total Interest Expense 3,330,000 2,687,000 9,059,000 6,860,000
----------- ----------- ----------- -----------
Net interest income 2,609,000 2,285,000 7,749,000 5,042,000
Provision for loan losses 30,000 30,000 140,000 55,000
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses 2,579,000 2,255,000 7,609,000 4,987,000
----------- ----------- ----------- -----------
Non-interest income:
Service fees 129,000 115,000 291,000 174,000
Tax refund program revenue 5,000 0 2,239,000 2,080,000
Other income 18,000 51,000 96,000 60,000
----------- ----------- ----------- -----------
152,000 166,000 2,626,000 2,314,000
----------- ----------- ----------- -----------
Non-interest expenses:
Salaries and Benefits 1,056,000 845,000 3,083,000 1,958,000
Occupancy/Equipment 315,000 281,000 867,000 639,000
Other expenses 561,000 571,000 1,944,000 1,138,000
----------- ----------- ----------- -----------
1,932,000 1,697,000 5,894,000 3,735,000
----------- ----------- ----------- -----------
Income before income taxes 799,000 724,000 4,341,000 3,566,000
----------- ----------- ----------- -----------
Provision for income taxes 274,000 224,000 1,337,000 1,189,000
----------- ----------- ----------- -----------
Net income $525,000 $500,000 $3,004,000 $2,377,000
=========== =========== =========== ===========
Net income per share:
Primary $0.14 $0.14 $0.79 $0.85
Fully diluted $0.14 $0.13 $0.78 $0.83
----------- ----------- ----------- -----------
Average common shares and CSE
outstanding:
Primary 3,846,497 3,663,111 3,815,186 2,791,819
Fully diluted 3,858,398 3,730,890 3,855,189 2,867,286
----------- ----------- ----------- -----------
</TABLE>
(See notes to consolidated financial statements)
5
<PAGE>
Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $3,004,000 $2,377,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 140,000 55,000
Write down of other real estate owned 70,000
Depreciation and amortization 302,000 183,000
(Increase) decrease in accrued income
and other assets (147,000) 663,000
Increase (decrease) in accrued expenses
and other liabilities 1,070,000 (153,000)
------------ ------------
Net cash provided by operating activities 4,439,000 3,125,000
------------ ------------
Cash flows from investing activities:
Purchase of securities:
Available for sale (1,950,000) 0
Held to Maturity (37,386,000) (26,901,000)
Proceeds from principal receipts, sales, and
maturities of securities 19,074,000 17,684,000
Net (increase) in loans (14,715,000) (372,000)
Cash Proceeds from acquisitions 0 12,155,000
Purchase of other real estate owned (1,406,000) 0
Premises and equipment expenditures (1,448,000) (137,000)
------------ ------------
Net cash provided by (used in) investing
activities (37,831,000) 2,429,000
------------ ------------
Cash flows from financing activities:
Net (decrease) in demand, money
market, and savings deposits (1,998,000) (4,589,000)
Net increase in borrowed funds 27,346,000 0
Net increase (decrease) in time deposits (157,000) 8,823,000
------------ ------------
Net cash provided by financing activities 25,191,000 4,234,000
------------ ------------
Increase (decrease) in cash and cash equivalents (8,201,000) 9,788,000
Cash and cash equivalents, beginning of period 15,496,000 3,856,000
============ ============
Cash and cash equivalents, end of period $7,295,000 $13,644,000
============ ============
Supplemental disclosure:
Interest paid $8,699,000 $6,327,000
============ ============
Non-cash transactions:
Net transfers to real estate owned from loans $539,000 0
============ ============
Changes in unrealized gain on securities
available for sale 0 ($26,000)
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE>
Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes In
Shareholders' Equity
For the Nine Months Ended September 30, 1997 and
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Unrealized
Gain on
Additional Securities Total
Common Paid in Retained Available Shareholders'
Stock Capital Earnings for Sale Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 $22,000 $6,647,000 $1,934,000 $19,000 $8,622,000
Acquisition of Execufirst Bancorp 12,000 7,040,000 0 0 7,052,000
Net income for the year 0 0 2,713,000 0 2,713,000
Change in unrealized gain
on securities available for sale 0 0 0 (16,000) (16,000)
Balance December 31, 1996 34,000 13,687,000 4,647,000 3,000 18,371,000
Net Income For the Period 0 0 3,004,000 0 3,004,000
-------------------------------------------------------------------------------
Stock options exercised 0 106,000 0 0 106,000
-------------------------------------------------------------------------------
Balance September 30, 1997 $34,000 $13,793,000 $7,651,000 $3,000 $21,481,000
===============================================================================
</TABLE>
(See notes to consolidated financial statements)
7
<PAGE>
REPUBLIC FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
In the opinion of Republic First Bancorp, Inc. ("the Company"), the
accompanying unaudited financial statements contain all adjustments (including
normal recurring accruals) necessary to present fairly the financial position as
of September 30, 1997, the results of operations for the three and nine months
ended, September 30, 1997 and 1996, and the cash flows for the nine months ended
September 30, 1997 and 1996. The interim results of operations may not be
indicative of the results of operations for the full year. The accompanying
unaudited financial statements should be read in conjunction with the Company's
audited financial statements, and the notes thereto, included in the Company's
1996 annual report.
The Company is a one-bank holding company organized and incorporated
under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiary,
First Republic Bank (the "Bank"), offers a variety of banking services to
individuals and businesses throughout the Greater Philadelphia and South Jersey
area through its offices and branches in Philadelphia and Montgomery Counties.
On June 7, 1996, Republic Bancorporation ("Republic"), parent company
of Republic Bank, its sole subsidiary, merged with and into ExecuFirst Bancorp,
Inc., ("ExecuFirst") parent company of First Executive Bank, its sole
subsidiary. Republic exchanged all of its common stock, for approximately
1,604,411 shares (approximately 56% of the combined total) of ExecuFirst's
common stock. Effective upon the merger, ExecuFirst changed its name to First
Republic Bancorp, Inc. Upon completion of the merger, Republic's shareholders
owned a majority of the outstanding shares of the consolidated Company's stock.
As a result, the transaction was accounted for as a reverse acquisition of
ExecuFirst by Republic solely for accounting and financial reporting purposes.
Therefore, Consolidated Statements of Operations and Consolidated Statements of
Cash Flows for the nine months ended September 30, 1996 are those of Republic
from the date of the merger through September 30, 1996 and may not be comparable
to the current year Consolidated Statements. The operations of ExecuFirst have
been included in the Company's financial statements since the date of
acquisition. Historical shareholders' equity and earnings per share of Republic
prior to the merger have been retroactively restated (a recapitalization) for
the equivalent number of shares received in the merger after giving effect to
any differences in par value of the respective stock of ExecuFirst and Republic.
The September 30, 1997 and December 31, 1996 Consolidated Balance
Sheets include the effect of the merger on a purchase accounting basis based on
the fair market value of ExecuFirst's common stock at a price of $5.75 per
share, the estimated market value of the stock for a reasonable period before
and after November 17, 1995, the announcement date of the merger. The purchase
price calculated for accounting purposes amounted to $7,052,000, which is the
result of multiplying the $5.75 per share market value of ExecuFirst by the
outstanding shares of ExecuFirst of approximately 1,226,000 (prior to subsequent
dividends) at the announcement date of the merger, plus acquisition expenses
incurred by Republic, as a result of the merger, in the amount of $1,193,000.
8
<PAGE>
The purchase price has been allocated to the respective assets acquired
and the liabilities based on their estimated fair market values, net of
applicable income tax effects. Negative goodwill in the amount of $1,045,000 was
generated for purchase accounting purposes and was applied against (i) bank
premises and equipment in the amount of $276,000, (ii) other real estate owned
in the net amount of $84,000, and (iii) the net deferred tax asset in the amount
of $685,000. No negative goodwill remains after application to these non-current
assets.
2. Reclassifications:
Certain items in the 1996 financial statements were reclassified to
conform to 1997 presentation format.
Additionally, the Company declared a six for five stock split effected
in the form of a dividend on March 4, 1997 for all shareholders of record of the
Company on that date. Average common shares and common share equivalents, and
all other share presentations have been retroactively restated as if the
dividend was declared at the earliest period presented herein.
On November 11, 1997, the Company commenced the sale of 1,000,000
shares of its common stock at $12.00 per share in a firm commitment underwritten
public offering managed by Janney Montgomery Scott Inc. The purpose of the
offering is to raise capital to permit the Company to expand its branch network
and take advantage of future growth opportunities. The settlement is anticipated
to be November 14, 1997.
3. Earnings Per Share:
Earnings per common share, and common equivalent shares, are based on
the weighted average number of common shares and common equivalent shares
outstanding during the periods. Stock options are included as share equivalents
when dilutive. Common stock equivalents had a dilutive effect for the nine
months and three months ended September 30, 1997 and 1996.
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share".
This Statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, Earnings Per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement requires restatement of all prior
period EPS data presented upon adoption. Had the Company adopted SFAS No. 128 as
of September 30, 1997, pro forma basic earnings per share would have been $0.14
and $0.15 for the three months ended September 30, 1997 and 1996, respectively,
and $0.87 and $0.92 for the nine months ended September 30, 1997 and 1996,
respectively.
9
<PAGE>
4. Investment Securities:
The Company classifies certain investments under one of the following
categories: "held-to-maturity" which is accounted for at historical cost,
adjusted for accretion of discounts and amortization of premiums;
"available-for-sale" which is accounted for at fair market value, with
unrealized gains and losses reported as a separate component of shareholders'
equity; or "trading" which is accounted for at fair market value, with
unrealized gains and losses reported as a component of net income. The Bank does
not hold "trading" securities.
At September 30, 1997, the Bank had identified certain investment
securities that are being held for indefinite periods of time, including
securities that will be used as part of the Bank's asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments and similar factors. These securities are classified as
available-for-sale and are intended to increase the flexibility of the Bank's
asset/liability management. Available-for-sale securities consist of US
Government Agency securities and other investments. The book and market values
of securities available-for-sale were $3,159,000 and $3162,000 respectively, as
of September 30, 1997. The net unrealized gain on securities available-for-sale,
as of this date, was $3,000, net of tax.
The following table represents the carrying and estimated fair values of
Investment Securities at September 30, 1997.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Available-for-Sale ($000) Cost Gain Loss Fair Value
- --------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
US Government Agencies $3,159 $7 ($4) $3,162
- --------------------------------------- ------- ------- ------- -------
Total Available-for-Sale $3,159 $7 ($4) $3,162
- --------------------------------------- ------- ------- ------- -------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity ($000) Cost Gain Loss Fair Value
- --------------------------------------- ------- ------- ------- -------
Mortgage-backed Securities $30,792 $26 $(52) $30,766
US Government Agencies 63,323 846 (236) 63,933
Other 3,837 -- -- 3,837
- --------------------------------------- ------- ------- ------- -------
Total Held-to-Maturity $97,952 $872 $(288) $98,536
- --------------------------------------- ------- ------- ------- -------
</TABLE>
10
<PAGE>
Item 2:
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
On June 7, 1996 Republic, parent company of Republic Bank, merged with
and into ExecuFirst, parent company of First Executive Bank. In the Merger,
ExecuFirst issued 1,604,411 shares (56% of the combined total) of its common
stock to Republic's shareholders. Effective upon the Merger, ExecuFirst changed
its name to First Republic Bancorp, Inc. The Company subsequently changed its
name to Republic First Bancorp, Inc. Upon completion of the Merger, Republic's
shareholders owned a majority of the outstanding shares of the consolidated
company's stock. As a result, the transaction was accounted for as a reverse
acquisition of ExecuFirst by Republic solely for accounting and financial
reporting purposes. The operations of ExecuFirst have been included in the
Company's financial statements since the date of the Merger. Therefore, the
Consolidated Financial Statements for the periods prior to 1996 are those of
Republic only, and may not be comparable to the Consolidated Financial
Statements for 1996 and 1997. Historical shareholders' equity of Republic prior
to the Merger has been retroactively restated for the equivalent number of
shares received in the Merger after giving effect to the differences in par
value of the respective stock of each Company. Additionally, the Company
declared a six for five stock split effected in the form of a dividend on March
4, 1997 for all shareholders of record of the Company on that date. Average
common shares and common share equivalents, and all other share presentations
have been retroactively restated as if the dividend was declared at the
beginning of each respective period.
Republic Bank and First Executive Bank each opened in 1988, with
similar marketing strategies. At the signing of the merger agreement, each had
assets of approximately $130 million. Republic Bank had two offices in Center
City Philadelphia and an office in Ardmore, Montgomery County and First
Executive Bank had two offices in Center City Philadelphia. After the Merger,
the Bank initiated a more aggressive branch expansion and marketing program
targeting customers of larger financial institutions that were recently
acquired. The Bank opened branches on City Line Avenue, Philadelphia and in East
Norriton, Montgomery County in the first half of 1997. Additionally, the Bank
will open a seventh branch office in Abington, Montgomery County in November
1997. The Bank has formed a planning committee to evaluate prospective locations
for new branches which meet the committee's criteria. The planning committee
currently has 15 sites under review.
Future growth plans include the opening of three new branch offices per
year in 1998 and 1999. Management's goal in establishing these new branches is
to achieve deposits at each branch of at least $35.0 million in three years or
less. The Company's net income historically has been affected by new branch
openings because the Company incurs incremental non-interest expense when
opening a new branch office. Because the Company is substantially larger in 1997
than it was when it previously opened branches in 1992 and 1995, management
expects that the incremental non-interest expense resulting from such openings
as a percentage of net income will be substantially less in 1997 and future
years than it was in the past.
11
<PAGE>
The Company's Tax Refund Program is a significant component of the
Company's net income and provides capital to support the Bank's rapid branch
expansion. The Tax Refund Program generated $2.2 million and $2.1 million in
revenue during 1997 and 1996, respectively. The Tax Refund Program earnings are
realized primarily in the first quarter of the year. These pretax earnings
constituted approximately 70% and 89% of the Company's first quarter 1997 and
1996 pretax earnings, respectively, and 51.2% of the Company's pretax earnings
for the year ended December 31, 1996. Revenue generated by the Tax Refund
Program accounted for 11.5% and 14.6% of total revenues for the nine months
ended September 30, 1997 and 1996, respectively. Management has been encouraged
by the success of the Tax Refund Program and looks forward to continuing
participation in the future. The Company recently signed an extension (with
automatic renewals) of the Tax Refund Program agreement with its partner,
Jackson Hewitt, ensuring the Company's participation through the April 1999 tax
season.
Organization:
Republic First Bancorp, Inc. ("the Company") is a one-bank holding
company organized and incorporated under the laws of the Commonwealth of
Pennsylvania. Its wholly-owned subsidiary, First Republic Bank (the "Bank"),
offers a variety of banking services to individuals and businesses throughout
the Greater Philadelphia and South Jersey area through its offices and branches
in Philadelphia and Montgomery Counties.
Effective July 15, 1997, the Company changed its name from First
Republic Bancorp, Inc. to Republic First Bancorp, Inc. This change was made to
avoid confusion with First Republic Bancorp of California, which is not
associated with this Philadelphia based Company. The ticker symbol for the
NASDAQ National Market System (FRBK) will remain the same and the subsidiary
bank will continue to use the name First Republic Bank within certain
territories.
The September 30, 1997 and December 31, 1996 Consolidated Balance
Sheets reflect the effect of the merger on a purchase accounting basis based on
the fair market value of ExecuFirst's common stock at a price of $5.75 per
share, the estimated market value of the stock for a reasonable period before
and after November 17, 1995, the announcement date of the merger. The purchase
price calculated for accounting purposes amounted to $7,052,000, which is the
result of multiplying the $5.75 per share market value of ExecuFirst by the then
outstanding shares of ExecuFirst of approximately 1,226,000 (prior to subsequent
dividends) at the announcement date of the merger, plus acquisition expenses
incurred by Republic, as a result of the merger, in the amount of $1,193,000.
The purchase price has been allocated to the respective assets acquired
and the liabilities based on their estimated fair market values, net of
applicable income tax effects. Negative goodwill in the amount of $1,045,000 was
generated for purchase accounting purposes and was applied against (i) bank
premises and equipment in the amount of $276,000, (ii) other real estate owned
in the net amount of $84,000, and (iii) the net deferred tax asset in the amount
of $685,000. No negative goodwill remains after application to these non-current
assets.
12
<PAGE>
Results of Operations for the Nine Months Ended September 30, 1997 and 1996
Overview
The Company's net income increased $627,000, or 26.4%, to $3.0 million
for the nine months ended September 30, 1997, from $2.4 million for the nine
months ended September 30, 1996. The earnings increased primarily due to an
increase in net interest income. Although net income for the comparative periods
increased, primary and fully-diluted earnings per share for the nine months
ended September 30, 1997 were $0.79 and $0.78 compared to $0.85 and $0.83,
respectively, for the nine months ended September 30, 1996, due to the Merger
which resulted in a materially greater number of average shares outstanding for
the nine months ended September 30, 1997.
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily upon the
Bank's net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is affected by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities. The following table
provides an analysis of net interest income on an annualized tax-equivalent
basis, setting forth for the periods (i) average assets, liabilities, and
shareholders' equity, (ii) interest income earned on interest-earning assets and
interest expense paid on interest-bearing liabilities, (iii) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, and (iv) the Bank's net interest margin (net interest income as a
percentage of average total interest-earning assets). All averages are computed
based on daily balances. Nonaccrual loans are included in average loans
receivable.
13
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1997 1996
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
INTEREST-EARNING ASSETS: Balance Expenses(1) Rate(2) Balance Expenses(1) Rate(2)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $7,514 $300 5.34% $31,741 $1,195 5.03%
Investment securities (2) 84,048 4,192 6.65% 53,471 2,462 6.14%
Loans receivable (3) 180,019 12,316 9.15% 112,735 8,245 9.78%
-------- ------ ---- -------- ------ ----
Total interest earning assets $271,581 $16,808 8.28% $197,947 $11,902 8.04%
-------- ------ ---- -------- ------ ----
Other assets 32,318 17,799
Total assets $303,899 $215,746
======== ========
INTEREST-BEARING LIABILITIES:
Demand deposits, non-interest bearing $52,502 $0 N/A $32,104 $0 N/A
Savings deposits 2,477 47 2.54% 1,262 23 2.44%
Demand deposits, interest bearing 8,525 159 2.49% 4,327 82 2.53%
Money market 26,284 645 3.28% 14,699 444 4.04%
Time deposits under $100,000 144,604 6,373 5.89% 112,186 4,908 5.85%
Time deposits $100,000 and above 29,086 1,214 5.58% 26,251 1,193 6.08%
-------- ------ ---- -------- ------ ----
Total deposits $263,478 $8,438 4.28% $190,829 $6,650 5.60%
Total interest bearing deposits $210,976 $8,438 5.35% $158,725 $6,650 5.60%
-------- ------ ---- -------- ------ ----
Other borrowed funds 13,665 621 6.08% 3,400 210 8.26%
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities 224,641 9,059 5.39% 162,125 6,860 5.66%
-------- ------ ---- -------- ------ ----
Other liabilities 6,459 7,302
Shareholders' equity 20,297 14,215
Total liabilities and shareholders'
equity $303,899 $215,746
Net interest income $7,749 $5,042
====== ======
Net interest spread 3.90% 3.32%
==== ====
Net interest margin (4) 3.82% 3.41%
==== ====
<FN>
(1) Includes loan fee income.
(2) Yields on investments are calculated based on Amoritized costs; all yields
are annualized.
(3) Loans outstanding include non-accruing loans.
(4) Represents the difference between interest earned and interest paid,
divided by average total interest earning assets.
</FN>
</TABLE>
14
<PAGE>
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and
rate components of interest income and interest expense. The following table
sets forth an analysis of volume and rate changes in net interest income for the
periods indicated. For purposes of this table, changes in interest income and
interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 vs. 1996
Change Due to
Average Average Increase
Volume Rate (Decrease)
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Interest earned on:
Federal Funds Sold $(984) $89 $(895)
Securities 1,448 282 1,730
Loans Receivable 4,800 (729) 4,071
------- ------- -------
Total interest income 5,264 (358) 4,906
Interest paid on:
Demand deposits, money market 426 (124) 302
and savings deposits
Time deposits 1,557 (71) 1,486
Other borrowed funds 501 (90) 411
------- ------- -------
Total interest expense 2,484 (285) 2,199
------- ------- -------
Net interest income $2,780 $(73) $2,707
======= ======= =======
</TABLE>
The Company's net interest margin increased 41 basis points to 3.82%
for the nine months ended September 30, 1997 from 3.41% for the nine months
ended September 30, 1996. This increase was primarily due to an increase in the
average volume of interest-earnings assets. The average yield on
interest-earning assets increased 24 basis points to 8.28% for the nine months
ended September 30, 1997 from 8.04% for the nine months ended September 30,
1996. The average rate on interest-bearing liabilities decreased by 27 basis
points to 5.39% for the nine months ended September 30, 1997 from 5.66% for the
nine months ended September 30, 1996.
The Company's net interest income increased $2.7 million, or 53.7%, to
$7.7 million for the nine months ended September 30, 1997 from $5.0 million for
the nine months ended September 30, 1996. The increase in net interest income
was primarily due to an increase in average interest-earning assets due, in
part, to the Merger and also as a result of increased business development. The
Company's total interest income increased $4.9 million, or 41.2%, to $16.8
million for the nine months ended September 30, 1997 from $11.9 million for the
nine months ended September 30, 1996. Interest and fees on loans increased $4.1
million, or 49.4%, to $12.3 million for the nine months ended September 30, 1997
from $8.2 million for the nine months
15
<PAGE>
ended September 30, 1996, largely as a result of an increase in average loan
balances of $67.3 million, or 59.7%, to $180.0 million for the nine months ended
September 30, 1997 from $112.7 million for the nine months ended September 30,
1996. The yield on the loan portfolio declined 63 basis points to 9.15% for the
nine months ended September 30, 1997 from 9.78% for the nine months ended
September 30, 1996. This decrease was due primarily to the change in the
composition of the loan portfolio and a higher level of non-accrual loans, both
as a result of the Merger, as well as more competitive pricing for commercial
loan products. Also contributing to the increase in total interest income was an
increase in interest and dividend income on securities of $1.7 million, or
70.3%, to $4.2 million for the nine months ended September 30, 1997 from $2.5
million for the nine months ended September 30, 1996. This increase in
investment income was the result of a combination of an increase in the average
balance of securities owned of $30.5 million, or 57.0% to $84.0 million for the
nine months ended September 30, 1997 from $53.5 million for the nine months
ended September 30, 1996 and an increase in yield on the average balance in
securities held to 6.65% for the nine months ended September 30, 1997 from 6.14%
for the nine months ended September 30, 1996.
The increase in the average balance of securities is the result of
leveraged funding programs employed by the Company that use Federal Home Loan
Bank ("FHLB") advances to fund securities purchases. The purpose of these
programs is to target growth in net interest income while managing liquidity,
credit, market and interest rate risk. From time-to-time, a specific leveraged
funding program may attempt to achieve current earnings benefits by funding
security portfolio increases partially with short-term FHLB advances with the
expectation that future growth in deposits will replace the FHLB advances at
maturity.
The increase in average yield on interest-earning assets was largely
the result of the Company's strategy to reduce its investment in overnight
funds, better utilize its borrowing capacity with FHLB advances, and minimize
lower yield assets needed for short-term liquidity needs.
The Company's total interest expense increased $2.2 million, or 32.1%,
to $9.1 million for the nine months ended September 30, 1997 from $6.9 million
for the nine months ended September 30, 1996. This increase was due to an
increase in the volume of average interest-bearing liabilities of $62.5 million,
or 38.6%, to $224.6 million for the nine months ended September 30, 1997 from
$162.1 million for the nine months ended September 30, 1996. The average rate
paid on interest-bearing liabilities decreased 27 basis points to 5.39% for the
nine months ended September 30, 1997 from 5.66% for the nine months ended
September 30, 1996 due to a decrease in money market and time deposits.
Interest expense on certificates of deposit increased $1.5 million, or
24.4%, to $7.6 million for the nine months ended September 30, 1997 from $6.1
million for the nine months ended September 30, 1996. This increase was due to
an increase in the average volume of certificates of deposit in the amount of
$35.3 million, or 25.5%, to $173.7 million for the nine months ended September
30, 1997 from $138.4 million for the nine months ended September 30, 1996,
partially offset by decreases in the average interest rates to 5.84% from 5.89%,
for the comparative periods.
Interest expense on FHLB advances was $621,000 for the nine months
ended September 30, 1997. The Company had no FHLB advances for the nine months
ended September 30, 1996. In 1997, $13.7 million of FHLB advances funded
purchases of securities and origination of loans as part of an ongoing leveraged
funding program designed to increase earnings while also managing interest rate
risk and liquidity. Additionally, the Company utilized FHLB borrowings to fund
the Tax Refund Program in 1997. The Company used brokered certificates of
deposit to fund the Tax Refund Program in 1996. The Company incurred no interest
expense on subordinated debt in the nine months ended September 30, 1997
compared to
16
<PAGE>
$210,000 in the nine months ended September 30, 1996 as this debt was retired
during the fourth quarter of 1996.
Provision for Loan Losses
The provision for loan losses is charged to operations to bring the
total allowance for loan losses to a level considered appropriate by management.
The level of the allowance for loan losses is determined by management based
upon its evaluation of the known as well as inherent risks within the Bank's
loan portfolio. Management's periodic evaluation is based upon an examination of
the portfolio, past loss experience, current economic conditions, the results of
the most recent regulatory examinations and other relevant factors. The
provision for loan losses increased $85,000, or 154%, to $140,000 for the nine
months ended September 30, 1997 from $55,000 for the nine months ended September
30, 1996. Non-performing assets were 1.18% of total assets at September 30,
1997, compared to 0.81% at December 31, 1996. Delinquencies were 0.36% of total
loans at September 30, 1997, compared to 0.75% at December 31, 1996.
Non-interest Income
Total other income increased $312,000, or 13.5%, to $2.6 million for
the nine months ended September 30, 1997 from $2.3 million for the nine months
ended September 30, 1996. The increase was due primarily to a $159,000 increase
in Tax Refund Program income associated with an increase in Tax Refund Product
sales in the 1997 tax return season compared to the 1996 tax return season.
Additionally, Bank service fees increased $117,000 due to the increase in
deposit account activity on higher average levels of deposit balances as a
result of the Merger.
Non-interest Expenses
Total other expenses increased $2.2 million, or 58.9%, to $5.9 million
for the nine months ended September 30, 1997 from $3.7 million for the nine
months ended September 30, 1996. Salaries and benefits increased $1.1 million,
or 57.5%, to $3.1 million for the nine months ended September 30, 1997 from $2.0
million for the nine months ended September 30, 1996. The increase was due
primarily to an increase in staff as a result of the Merger as well as increases
associated with the expansion of the branches and business development staff.
Occupancy and equipment expenses increased $228,000, or 35.7%, to $867,000 for
the nine months ended September 30, 1997 from $639,000 for the nine months ended
September 30, 1996 as a result of opening additional branch offices. Other
operating expenses increased $806,000, or 70.8%, to $2.0 million for the nine
months ended September 30, 1997 from $1.1 million for the nine months ended
September 30, 1996. Other operating expenses encompass all expenses not
otherwise categorized, and include items such as data processing costs,
professional fees, advertising costs, printing and supplies, insurance and other
miscellaneous expenses. The primary reason for increases in other operating
expenses was the growth of the Bank associated with the Merger and increased
expenses related to the opening of new branch offices.
Provision for Income Taxes
The provision for income taxes increased $148,000, or 12.4%, to $1.3
million for the nine months ended September 30, 1997 from $1.2 million for the
nine months ended September 30, 1996. The increase of $148,000 results from the
increase in pre-tax income from 1996 to 1997.
17
<PAGE>
Results of Operations for the Three Months Ended September 30, 1997 and 1996
Overview
The Company's net income increased $25,000 or 5.0%, to $525,000 for the
three months ended September 30, 1997, from $500,000 for the three months ended
September 30, 1996. The earnings increased primarily due to an increase in net
interest income. Although net income for the comparative periods increased,
primary and fully-diluted earnings per share for the three months ended
September 30, 1997 were relatively flat at $0.14 and $0.14 compared to $0.14 and
$0.13, respectively, for the three months ended September 30, 1996.,
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily upon the
Bank's net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is affected by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities. The following table
provides an analysis of net interest income on an annualized tax-equivalent
basis, setting forth for the period (i) average assets, liabilities, and
shareholders' equity, (ii) interest income earned on interest-earnings assets
and interest expense paid on interest-bearing liabilities, (iii) average yields
earned on interest-earning assets and average rates paid on interest-bearing
liabilities, and (iv) the Bank's net interest margin (net interest income as a
percentage of average total interest-earning assets). All averages are computed
based on daily balances. Nonaccrual loans are included in average loans
receivable.
18
<PAGE>
<TABLE>
<CAPTION>
Quarter Quarter
Sep-97 Sep-96
Interest Interest
Average Income/ Annualized Average Income/ Annualized
INTEREST-EARNING ASSETS: Balance Cost Yield Balance Cost Yield
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $708,000 $10,000 5.61% $4,560,000 $66,000 5.74%
Investment securities 92,495,000 1,565,000 6.77% 76,767,000 1,213,000 6.32%
Loans receivable (3) 183,549,000 4,364,000 9.43% 160,892,000 3,693,000 9.11%
-------------------------------------------- --------------------------------------------
Total interest earning assets $276,751,000 $5,939,000 8.61% $242,219,000 $4,972,000 8.23%
-------------------------------------------- --------------------------------------------
Other assets 16,168,000 15,400,000
Total assets $292,920,000 $257,619,000
=============== ================
INTEREST-BEARING LIABILITIES:
Demand deposits, non-interest bearing $28,827,000 $0 N/A $27,975,000 N/A
Demand deposits, interest bearing 7,738,000 49,000 2.51% 7,496,000 50,000 2.65%
Money market and savings deposits 27,797,000 233,000 3.33% 28,059,000 209,000 2.96%
Time deposits under $100,000 149,654,000 2,285,000 6.06% 138,016,000 1,960,000 5.63%
Time deposits $100,000 and above 26,870,000 390,000 5.76% 27,894,000 398,000 5.66%
-------------------------------------------- --------------------------------------------
Total deposits $240,886,000 $2,957,000 4.92% $229,440,000 $2,617,000 4.57%
Total interest bearing deposits $212,059,000 $2,957,000 5.59% $201,465,000 $2,617,000 5.21%
-------------------------------------------- --------------------------------------------
Other borrowed funds 24,509,000 373,000 6.10% 3,400,000 70,000 8.26%
-------------------------------------------- --------------------------------------------
Total interest bearing liabilities 265,395,000 5.03% 4.63%
3,330,000 232,840,000 2,687,000
============================================ ============================================
Other liabilities 6,413,000 4,411,000
Shareholders' equity 21,112,000 20,368,000
--------------- ----------------
Total liabilities and shareholders' equity 292,920,000 257,619,000
=============== ================
Net interest income $2,609,000 $2,285,000
Net interest spread 3.57% 3.60%
Net interest margin (4) 3.82% 3.83%
</TABLE>
(1) Includes loan fee income.
(2) Yields on investments are calculated based on Amoritized costs; all
yields are annualized.
(3) Loans outstanding include non-accruing loans.
(4) Represents the difference between interest earned and interest paid,
divided by average total interest earning assets.
19
<PAGE>
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and
rate components of interest income and interest expense. The following table
sets forth an analysis of volume and rate changes in net interest income for the
periods indicated. For purposes of this table, changes in interest income and
interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates.
Three Months Ended September 30,
1997 vs. 1996
Change Due to
(in thousands) Average Average Increase
Volume Rate (Decrease)
(in thousands)
Interest earned on:
Federal Funds Sold $(54) $(2) $(56)
Securities 241 111 352
Loans Receivable 501 170 671
----- ----- -----
Total interest income $688 $279 $967
----- ----- -----
Interest paid on:
Demand deposits, money market $0 $23 $23
and savings deposits
Time deposits 133 184 317
Other borrowed funds 333 (30) 303
----- ----- -----
Total interest expense 466 177 643
----- ----- -----
Net interest income $222 $102 $324
----- ----- -----
Company's net interest margin was virtually unchanged for the three
months ended September 30, 1996 from 3.83% to 3.82% for the three months ended
September 30, 1997. The average yield on interest-earning assets increased 38
basis points to 8.61% for the three months ended September 30, 1997 from 8.23%
for the three months ended September 30, 1996. The average rate on
interest-bearing liabilities increased by 40 basis points to 5.03% for the three
months ended September 30, 1997 from 4.63% for the three months ended September
30, 1996 primarily due to the higher cost of certificates of deposit.
The Company's net interest income increased $324,000, or 14.2%, to $2.6
million for the three months ended September 30, 1997 from $2.3 million for the
three months ended September 30, 1996. The increase in net interest income was
primarily due to an increase in average interest-earnings assets due to
increased loan volume as a result of increased business development and an
increase in the levels of
20
<PAGE>
investment securities. The Company's total interest income increased $967,000,
or 19.5%, to $5.9 million for the three months ended September 30, 1997 from
$5.0 million for the three months ended September 30, 1996. Interest and fees on
loans increased $671,000, or 18.2%, to $4.4 million for the three months ended
September 30, 1997 from $3.7 million for the three months ended September 30,
1996, largely as a result of an increase in average loan balances of $22.7
million, or 14.1%, to $183.6 million for the three months ended September 30,
1997 from $160.9 million for the three months ended September 30, 1996. The
yield on the loan portfolio increased 32 basis points to 9.43% for the three
months ended September 30, 1997 from 9.11% for the three months ended September
30, 1996. This increase was due primarily to the recognition of interest income
on loans which were previously on non-accrual status. Also contributing to the
increase in total interest income was an increase in interest and dividend
income on securities of $352,000, or 29.0%, to $1.6 million for the three months
ended September 30, 1997 from $1.2 million for the three months ended September
30, 1996. This increase in investment income was the result of a combination of
an increase in the average balance of securities owned of $15.7 million, or
20.5% to $92.5 million for the three months ended September 30, 1997 from $76.8
million for the three months ended September 30, 1996 and an increase in yield
on the average balance in securities held to 6.77% for the three months ended
September 30, 1997 from 6.32% for the three months ended September 30, 1996.
The increase in the average balance of securities is the result of
leveraged funding programs employed by the Company that use Federal Home Loan
Bank ("FHLB") advances to fund securities purchases. The purpose of this program
is to target growth in net interest income while managing liquidity, credit,
market and interest rate risk. From time-to-time, a specific leveraged funding
program may attempt to achieve current earnings benefits by funding security
portfolio increases partially with short-term FHLB advances with the expectation
that future growth in deposits will replace the FHLB advances at maturity.
The increase in average yield on interest-earning assets was largely
the result of the Company's strategy to reduce its investment in overnight
funds, better utilize its borrowing capacity with FHLB advances, and minimize
lower yield assets needed for short-term liquidity needs.
The Company's total interest expense increased $643,000, or 23.9%, to
$3.3 million for the three months ended September 30, 1997 from $2.7 million for
the three months ended September 30, 1996. This increase was due to an increase
in the volume of average interest-bearing liabilities of $32.6 million, or
14.0%, to $265.4 million for the three months ended September 30, 1997 from
$232.8 million for the three months ended September 30, 1996. The average rate
paid on interest-bearing liabilities increased 40 basis points to 5.03% for the
three months ended September 30, 1997 from 4.63% for the three months ended
September 30, 1996 primarily due to an increase in time deposits.
Interest expense on certificates of deposit increased $317,000, or
13.4%, to $2.7 million for the three months ended September 30, 1997 from $2.4
million for the three months ended September 30, 1996. This increase was due to
an increase in the average volume of certificates of deposit in the amount of
$10.6 million, or 6.4%, to $176.5 million for the three months ended September
30, 1997 from $165.9 million for the three months ended September 30, 1996.
Interest expense on FHLB advances increased to $373,000 for the three
months ended September 30, 1997; the Company had no FHLB advances for the three
months ended September 30, 1996. During the first quarter of 1997, $20.0 million
of FHLB advances funded purchases of securities and origination of loans as part
of an ongoing leveraged funding program designed to increase earnings while also
managing interest rate risk and liquidity. The Company incurred no interest
expense on subordinated debt in the three months ended September 30, 1997
compared to $70,000 in the three months ended
21
<PAGE>
September 30, 1996 as this debt was retired during the fourth quarter of 1996.
Provision for Loan Losses
The provision for loan losses is charged to operations to bring the
total allowance for loan losses to a level considered appropriate by management.
The level of the allowance for loan losses is determined by management based
upon its evaluation of the known as well as inherent risks within the Bank's
loan portfolio. Management's periodic evaluation is based upon an examination of
the portfolio, past loss experience, current economic conditions, the results of
the most recent regulatory examinations and other relevant factors. The
provision for loan losses was unchanged at $30,000 for the three months ended
September 30, 1997 and 1996.
Non-interest Income
Total other income decreased $14,000, or 8.4%, to $152,000 for the
three months ended September 30, 1997 from $166,000 for the three months ended
September 30, 1996. The decrease was due primarily non-recurring miscellaneous
income during the third quarter of 1996.
Non-interest Expenses
Total other expenses increased $235,000, or 13.9%, to $1.9 million for
the three months ended September 30, 1997 from $1.7 million for the three months
ended September 30, 1996. Salaries and benefits increased $211,000, or 25.0%, to
$1.1 million for the three months ended September 30, 1997 from $845,000 for the
three months ended September 30, 1996. The increase was due primarily to an
increase in staff as a result of increases associated with the expansion of the
branches and business development staff. Occupancy and equipment expenses
increased $34,000, or 12.1%, to $315,000 for the three months ended September
30, 1997 from $281,000 for the three months ended September 30, 1996 as a result
of opening additional branch offices.
Provision for Income Taxes
The provision for income taxes increased $50,000, or 22.3%, to $274,000
for the three months ended September 30, 1997 from $224,000 million for the
three months ended September 30, 1996. This increase is the result of the
increase in pre-tax income from 1996 to 1997.
22
<PAGE>
Financial Condition
September 30, 1997 Compared to December 31, 1996
Total assets increased $29.4 million, or 10.7%, to $303.2 million at
September 30, 1997 from $273.8 million at December 31, 1996. The increase in
assets was the result of higher levels of loans and securities, which were
funded by the net increase in borrowings in the nine months ended September 30,
1997. Net loans increased $14.4 million, or 8.5%, to $184.4 million at September
30, 1997 from $170.0 million at December 31, 1996. Securities increased $20.2
million, or 24.9%, to $101.1 million at September 30, 1997 from $81.0 million at
December 31, 1996. The increase was due primarily to the purchase of $20.0
million in securities as part of the Company's leveraged funding strategy which
is intended to increase earnings.
Cash and due from banks, interest-bearing deposits, which are held at
the Federal Home Loan Bank of Pittsburgh, and Federal Funds sold are all liquid
funds. The aggregate amount in these three categories decreased by $8.2 million,
or 52.9%, to $7.3 million at September 30, 1997 from $15.5 million at December
31, 1996 because the Company redeployed these funds into higher yielding loans
and securities. This redeployment of liquid assets was done in anticipation of
the utilization of the Company's borrowing capacity with the FHLB.
Investment Securities:
The Company classifies certain investments under one of the following
categories: "held-to-maturity" which are accounted for at historical cost,
adjusted for accretion of discounts and amortization of premiums;
"available-for-sale" which are accounted for at fair market value, with
unrealized gains and losses reported as a separate component of shareholders'
equity; or "trading" which are accounted for at fair market value, with
unrealized gains and losses reported as a component of net income. The Bank does
not hold "trading" securities.
At September 30, 1997, the Bank had identified certain investment
securities that are being held for indefinite periods of time, including
securities that will be used as part of the Bank's asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments and similar factors. These securities are classified as
available-for-sale and are intended to increase the flexibility of the Bank's
asset/liability management. Available-for-sale securities consist of US
Government Treasury and US Government Agency securities. The book and market
values of securities available-for-sale were $3,159,000 and $3,162,000
respectively, as of September 30, 1997. The net of tax, unrealized gain on
securities available-for-sale, as of this date, was $3,000.
At September 30, 1997, net loans totaled approximately $184.4 million
representing an increase of approximately $14.4 million compared to $170.0
million at December 31, 1996. The increase in commercial loans was attributable
to a more aggressive loan origination program, consistent with the Bank's
strategic plan. Additionally, the Company increased its investment securities
portfolio through purchases funded by Federal Home Loan Bank advances.
Approximately 40% of the loans receivable earn interest at rates that
vary overnight with changes in the Bank's prime rate. Approximately 45% in loans
receivable are comprised of fixed rate loans that will mature in the next five
years, while another 15% of loans receivable represent fixed rate loans which
will mature beyond five years.
23
<PAGE>
Listed below is a schedule of loans receivable. The loans are
categorized based on bank regulatory requirements, which categorizations are not
necessarily indicative of the actual type or purpose of the loan.
<TABLE>
<CAPTION>
Loans Receivable
At At
September 30, December 31,
1997 1996
% of % of
Loan Type Balance Total Balance Total
- ----------------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Loans collateralized by Real Estate:
One-to-four family residential $65,323,000 35.1 % $58,908,000 34.2 %
Multi-family residential 5,408,000 2.9 2,332,000 1.4
Commercial and other 71,645,000 38.4 62,016,000 36.0
-------------------------- ------------------------
Total loans collateralized by Real Estate 142,376,000 76.4 123,256,000 71.6
-------------------------- ------------------------
Commercial business loans 37,778,000 20.3 45,007,000 26.2
Other loans 6,180,000 3.3 3,831,000 2.2
========================== ========================
Total loans $186,334,000 100.0 % $172,094,000 100.0 %
========================== ========================
</TABLE>
Since its founding, the Bank's primary focus has been to service the
borrowing and deposit needs of small businesses and commercial real estate
investors. Many of the loans made to all of these categories of customers have
been collateralized by real estate, as set forth on the above chart.
Of the approximately $65.3 million in loans collateralized by
"one-to-four family residential" properties at September 30, 1997, only $3.7
million represent traditional residential mortgages. The remainder includes
loans made to investors who own small rental properties or business loans
secured by liens, often junior liens, on the residences of the principals. The
risk in business loans collateralized by liens on residential properties lies
more in the success or failure of the borrower's businesses than the real estate
market, although the value of the collateral is affected by variations in the
real estate market. Generally, housing prices in the Bank's market area fell
during the late 1980s and early 1990s, but more recently have been relatively
stable.
"Multi-family residential" and "Commercial and other" loans primarily
represent loans made to real estate investors and/or developers. This market
suffered dramatic declines in value during the late 1980s and early 1990s, but
has shown signs of stability in recent years. The degree of recovery, however,
is dependent on the type of property and its location. The Bank has strengthened
its ability to analyze and service such loans, and intends to continue its
penetration of this market, which it believes to be under-served, with a
resultant expectation of satisfactory interest rates, fees, and deposits.
Underwriting of such loans will continue to be performed in a conservative
manner.
"Commercial business loans" include loans to professionals and other
businesses not collateralized by real estate. $18.0 million of such loans were
collateralized by liquid collateral as of September 30, 1997. Another $7.5
million were unsecured, that is, made to borrowers considered to be of
sufficient strength to merit unsecured financing. The balance consists primarily
of loans collateralized by business assets, such as
24
<PAGE>
accounts receivable, inventory and/or equipment. The risk in business loans is
generally a function of local market and industry conditions, with any
collateral serving as the source of repayment.
The Bank intends to continue its lending focus on professionals while
expanding its commercial real estate and small business efforts. Additionally,
in a further attempt to diversify its portfolio and increase its market
penetration, the Bank has begun to emphasize consumer lending. All such plans
are highly dependent upon the strength of the economic environment in the Bank's
market area, as well as the specific industries on which it focuses.
Allowance for Loan Losses:
The Allowance for Loan Losses for the Bank was $1,931,000 as of
September 30, 1997. The Bank has a policy of increasing its Allowance for Loan
Losses by 0.60% of net new loans receivable. Based on numerous factors
including, but not limited to, the Bank's existing loan portfolio, the size of
its allowance for Loan Losses, results of regularly scheduled bank regulatory
field examinations, and Management's internal loan review decisions, the Bank
may make additions to the Allowance for Loan Losses other than the percentage
additions made in the ordinary course of business. Additionally, the Board of
Directors reviews reserve adequacy on a quarterly basis. Management believes
that the Allowance for Loan Losses is reasonable and adequate to cover any known
losses and any losses reasonably expected in the portfolio.
The Bank recorded a Provision for Loan Losses of $140,000 during the
nine months ended September 30, 1997 compared to $55,000 for the nine months
ended September 30, 1996, as loan growth was higher during 1997 compared to
1996. As a result of this provision for potential loan losses and following
certain recoveries net of charge-offs credited to the allowance for loan losses
as detailed below, the Bank's aggregate reserve for potential loan losses
increased to $1,931,000 at September 30, 1997 from $2,092,000 at December 31,
1996. Listed below is an analysis of the allowance for loan losses account:
Allowance for Loan Losses
Rollforward
Balance at December 31, 1996 $2,092,000
Charge-offs:
Commercial Loans 332,000
Consumer Loans 44,000
------------
Total charge-offs: 376,000
Recoveries
Commercial Loans 69,000
Installment Loans 6,000
------------
Total Recoveries 75,000
Additions charged to operations 140,000
------------
Balance at September 30, 1997 $1,931,000
------------
25
<PAGE>
As of September 30, 1997, the Bank had loans outstanding placed in a
non-accrual status totaling approximately $1,363,000 compared to $1,892,000 at
December 31, 1996. This decrease was mainly due to the transfer of approximately
$860,000 from non-accrual loans to other real estate owned. There was no
interest income recorded on non-accrual loans for the nine months ended
September 30, 1997. Management is actively pursuing the collection of all
troubled loans. It is uncertain as to the amount of any potential loss that may
be incurred in connection with the remaining non-accruing loans. The Bank has a
policy of generally placing on non-accrual status any loan for which payment of
either principal or interest, on a contractual basis, is not received or is
unlikely to be received for a period of 90 days. Such loans include those
classified by either the Bank or its regulators such that collection of the full
amount of principal and interest are considered doubtful.
Total deposits decreased to approximately $247.9 million during the
nine months ended September 30, 1997 from $250.1 million at December 31, 1996.
This was primarily the result of allowing higher priced retail certificates of
deposit to run off. These deposits were replaced primarily with short term
advances from the Federal Home Loan Bank of Pittsburgh
<TABLE>
<CAPTION>
Deposit Breakdown Table
At At
September 30, December 31,
1997 1996
% of % of
Type of Deposit Account Balance Total Balance Total
- ------------------------------------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Demand: non-interest bearing $33,961,000 13.7 % $32,611,000 13.0 %
Demand: interest bearing 8,233,000 3.3 10,181,000 4.1
Money Market and Savings 25,840,000 10.4 27,240,000 10.9
Time deposits under $100,000 152,947,000 61.7 150,800,00 60.3
Time deposits over $100,000 26,923,000 10.9 29,227,000 11.7
------------------------ ------------------------------
Total deposits 247,904,000 100.0 % $250,059,000 100.0 %
======================== ==============================
</TABLE>
Bank premises and equipment, net of accumulated depreciation, increased
$1.2 million, or 170.9%, to $1.9 million at September 30, 1997 from $711,000 at
December 31, 1996. The increase was attributable mainly to the construction of
the Bank's new branch offices.
Total liabilities increased $26.3 million, or 10.3%, to $281.7 million
at September 30, 1997 from $255.4 million at December 31, 1996. During the nine
months ended September 30, 1997, deposits, the Company's primary source of
funds, decreased $2.2 million, or 0.9%, to $247.9 million at September 30, 1997
from $250.1 million at December 31, 1996. The aggregate of transaction accounts,
which include demand, money market and savings accounts, decreased $2.0 million,
or 2.9%, to $68.0 million at September 30, 1997 from $70.0 million at December
31, 1996. Certificates of deposit declined $157,000, or 0.1%, to $179.8 million
at September 30, 1997 from $180 million at December 31, 1996. During the first
quarter of 1997 higher costing certificates of deposit were allowed to run-off
in favor of lower cost borrowings at the FHLB. This run-off was later partially
replaced by the growth in deposits from the new branches.
26
<PAGE>
FHLB borrowings increased to $27.3 million at September 30, 1997. There
were no FHLB borrowings at December 31, 1996. The increase was primarily the
result of the Company's leveraged funding strategy of utilizing short-term and
long-term FHLB advances to purchase investment securities and to fund new loan
originations.
Capital
The Company's Tier I capital to risk-weighted assets ratio was 10.97%
at September 30, 1997 compared to 10.08% at December 31, 1996. These ratios
exceeded the Tier I regulatory capital requirement of 4.00%. The Company's total
capital to risk-weighted assets ratio was 11.97% at September 30, 1997 compared
to 11.25% at December 31, 1996. These ratios exceeded the total risk-based
capital regulatory requirement of 8.00%. The Company's leverage ratio was 7.25%
at September 30, 1997, compared to 6.65% at December 31, 1996. The increase in
the Company's leverage ratio was due to the Company's higher level of earnings
in the nine months ended September 30, 1997. The Company remains categorized as
"well capitalized" under applicable Federal Regulations. The Bank is subject to
similar capital requirements adopted by the FRB. At September 30, 1997, the
Bank's capital exceeded all regulatory requirements and the Bank remains
categorized as "well capitalized" under applicable federal regulations.
Regulatory Capital Requirements:
The following table presents the Bank's capital ratios at September 30, 1997:
Tier I Capital $21,228,000
Tier II Capital 1,931,000
---------------
Total Capital $23,159,000
Total Average Quarterly Assets $292,920,000
Total Risk-Weighted Assets (1) 193,432,000
Tier I Risk-Based Capital Ratio (2) 10.97%
Required Tier I Risk-Based Capital Ratio 4.00%
---------------
Excess Tier I Risk-Based Capital Ratio 6.97%
Total Risk-Based Capital Ratio (3) 11.97%
Required Total Risk-Based Capital Ratio 8.00%
---------------
Excess Total Risk-Based Capital Ratio 3.97%
Tier I Leverage Ratio (4) 7.25%
Required Tier I Leverage Ratio 5.00%
---------------
Excess Tier I Leverage Ratio 2.25%
---------------
_________________________________________________________
(1) Includes off-balance sheet items at credit-equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital to
Total Risk- Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and
Tier II Capital to Total Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Total
Average Quarterly Assets.
27
<PAGE>
The Bank's ability to maintain the required level of capital is
substantially dependent upon the success of the Bank's capital and business
plans, the impact of future economic events on the Bank's loan customers, the
Bank's ability to manage its interest rate risk and control its growth and other
operating expenses.
In addition to the above minimum capital requirements, the Federal
Reserve Bank has promulgated rules to implement a statutory requirement that
federal banking regulators take specified "prompt corrective action" when an
insured institution's capital level falls below certain levels. The rule defines
five capital categories based on several of the above capital ratios. The Bank
currently exceeds the levels required for a bank to be classified as "well
capitalized". However, the Federal Reserve Bank may consider other criteria in
the future when determining such classifications that could result in a
downgrading in such classifications.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, take advantage of market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. Sources of asset
liquidity are provided by cash and amounts due from banks, interest-bearing
deposits with banks, and Federal Funds sold.
The Company's liquid assets totaled $7.3 million at September 30, 1997
compared to $15.5 million at December 31, 1996. Maturing and repaying loans are
another source of asset liquidity. At September 30, 1997, the Bank estimated
that an additional $15.8 million of loans will mature or repay in the next
six-month period ending March 31, 1998.
Liability liquidity can be met by attracting deposits with competitive
rates, buying Federal Funds or utilizing the facilities of the Federal Reserve
System or the Federal Home Loan Bank System. The Bank utilizes a variety of
these methods of liability liquidity. At September 30, 1997, the Bank had $70
million in unused lines of credit available to it under informal arrangements
with correspondent banks compared to $99 million at December 31, 1996. These
lines of credit enable the Bank to purchase funds for short-term needs at
current market rates.
At September 30, 1997, the Company had outstanding commitments
(including unused lines of credit and letters of credit) of $15.6 million.
Certificates of deposit which are scheduled to mature within one year totaled
$127.7 million at September 30, 1997, and borrowings that are scheduled to
mature within the same period amounted to $21.7 million. The Company anticipates
that it will have sufficient funds available to meet its current commitments.
As of September 30, 1997, capital expenditures that were anticipated
for the remainder of 1997 included approximately $400,000 required to complete
the site improvements and construction of a full-service branch in Abington,
Montgomery County. These cost estimates also include furniture, fixtures, and
equipment costs necessary to operate this office.
The Bank's target and actual liquidity levels are determined and
managed based on Management's comparison of the maturities and marketability of
the Bank's interest-earning assets with its projected future maturities of
deposits and other liabilities. As of September 30, 1997, the Bank maintained
$7.3 million in cash and cash equivalents in the form of cash and due from banks
(after reserve requirements) and overnight Federal Funds sold. This represented
2.4% of the total assets at September 30, 1997 as compared to 5.7% at
28
<PAGE>
December 31, 1996. Of the Bank's investment securities, approximately $7.0
million are pledged to secure public funds deposits and, therefore, are not
available for liquidity purposes.
Additionally, the Bank has established three lines of credit totaling
$99.0 million to assist in managing the Bank's liquidity position. As of
September 30, 1997, approximately $27.3 million was outstanding on the
aforementioned lines of credit.
Both liquidity and interest sensitivity are managed by the Finance
Committee of the Board of Directors. This Committee's primary objective is to
oversee and assist Management in various financial aspects of the Bank's
activities including asset/liability management.
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Bank typically defines interest-sensitive assets and interest-sensitive
liabilities as those that reprice within one year or less. Maintaining an
appropriate match is a method of avoiding wide fluctuations in net interest
margin during periods of changing interest rates.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods, and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP ratio suggests that a financial institution
may be better positioned to take advantage of declining interest rates rather
than increasing interest rates, and a positive GAP ratio suggests the converse.
Shortcomings are inherent in a simplified and static GAP analysis that
may result in an institution with a negative GAP having interest rate behavior
associated with an asset-sensitive balance sheet. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Furthermore,
repricing characteristics of certain assets and liabilities may vary
substantially within a given time period. In the event of a change in interest
rates, prepayment and early withdrawal levels could also deviate significantly
from those assumed in calculating GAP in the manner presented in the following
table.
The Bank attempts to manage its assets and liabilities in a manner that
stabilizes net interest income under a broad range of interest rate
environments. Adjustments to the mix of assets and liabilities are made
periodically in an effort to provide dependable and steady growth in net
interest income regardless of the behavior of interest rates.
The possible effect upon the Company and the Bank of any future
sustained rise in interest rates is believed by Management to have a negative
impact on net interest income, since the Bank does not have the ability to
respond to any such changes by quickly raising rates on many of its
interest-earning assets. However, a sustained decrease in interest rates
generally could have a positive effect on the Bank, due to a timing difference
in repricing the Bank's liabilities, primarily certificates of deposit, and its
interest-earning assets noted above. The Bank has the ability to reprice
interest bearing deposits, reflecting Money Market, NOW and Savings accounts, on
a weekly basis. As of September 30, 1997, 22.5% of the Bank's time
29
<PAGE>
deposits were to mature and be repriceable within three months of such date, and
an additional 13.0% were to be repriceable within three to six months.
The following table presents a summary of the Bank's interest rate
sensitivity GAP at September 30, 1997. For purposes of this table, the Bank has
used assumptions based on industry data and historical experience to calculate
the expected maturity of loans because, statistically, certain categories of
loans are prepaid before their maturity date, even without regard to interest
rate fluctuations. Additionally, certain prepayment assumptions were made with
regard to investment securities based upon the expected prepayment of the
underlying collateral of the mortgage-backed securities.
30
<PAGE>
The cumulative 12-month Interest Rate Sensitivity Gap at September 30,
1997 was a negative 4.8% compared to a negative 5.6% June 30, 1997 both of all
of which are within management's guidelines of +/- 20%.
Republic First Bancorp, Inc.
Interest Sensitive Gap
September 30, 1997
----------------------------------------------------------------------
<TABLE>
<CAPTION>
0 - 90 91 - 180 181 - 365 1 - 5 5 Yrs &
Days Days Days Years Over Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets:
Interest Bearing Balances
Due From Banks $ 2,058 $ 0 $ 0 $ 0 $ 0 $ 2,058
Federal Funds Sold -- -- -- -- -- --
Investment 31,307 6,903 6,427 24,765 31,712 101,114
Securities
Loans 84,136 6,833 14,831 54,036 26,498 186,334
--------------------------------------------------------------------------------------
Totals 117,501 13,736 21,258 78,801 58,210 289,506
======================================================================================
Cumulative Totals $ 117,501 $ 131,237 $ 152,495 $ 231,296 $ 289,506
--------------------------------------------------------------------------------------
Interest Sensitive Liabilities:
Demand Interest Bearing $ 4,117 $ -- $ -- $ 2,058 $ 2,058 $ 8,233
Savings Accounts 1,034 -- -- 1,033 2,067
Money Market Accounts 11,887 -- -- 5,943 5,943 23,773
FHLB Borrowings 18,621 1,325 1,800 5,600 27,346
Time Deposits 40,503 23,327 63,840 52,195 5 179,870
--------------------------------------------------------------------------------------
Totals $ 76,162 $ 24,652 $ 65,640 $ 65,796 $ 9,039 241,289
Cumulative Totals $ 76,162 $ 100,814 $ 166,454 $ 232,250 $ 241,289
=======================================================================
GAP $ 41,339 $ (10,916) $ (44,382) $ 13,005 $ 49,171 $ 48,217
Cumulative GAP $ 41,339 $ 30,423 $ (13,959) $ (954) $ 48,217 $ --
Interest Sensitive Assets/
Interest Sensitive Liabilities 1.5 1.3 0.9 1.0 1.2
Cumulative GAP/
Total Earning Assets 14.3% 10.5% -4.8% -0.3% 16.7%
Total Earning Assets 289,506
</TABLE>
31
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
Management is not aware of any pending or contemplated legal
action which would have a material adverse effect on the
Company.
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K Page Numbering
in Sequential
Numbering System
(a) Exhibits:
27 - Financial Data Schedule 35
(b) Form 8-K was filed by the Registrant on July 17, 1997 to
announce the name change of the Registrant from First Republic
Bancorp, Inc. to Republic First Bancorp, Inc. The stock ticker
symbol will remain the same ("FRBK").
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic First Bancorp, Inc.
/Rolf Stensrud/
Rolf Stensrud
President and Chief Executive Officer
/George S. Rapp/
George S. Rapp
Executive Vice President and Chief Financial Officer
Dated: November 14, 1997
33
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000834285
<NAME> FIRST REPUBLIC BANCORP INC
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,237,000
<INT-BEARING-DEPOSITS> 2,058,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,162,000
<INVESTMENTS-CARRYING> 97,952,000
<INVESTMENTS-MARKET> 0
<LOANS> 186,334,000
<ALLOWANCE> 1,931,000
<TOTAL-ASSETS> 303,166,000
<DEPOSITS> 247,904,000
<SHORT-TERM> 21,746,000
<LIABILITIES-OTHER> 6,435,000
<LONG-TERM> 5,600,000
<COMMON> 34,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 303,166,000
<INTEREST-LOAN> 4,364,000
<INTEREST-INVEST> 1,565,000
<INTEREST-OTHER> 10,000
<INTEREST-TOTAL> 5,939,000
<INTEREST-DEPOSIT> 2,957,000
<INTEREST-EXPENSE> 373,000
<INTEREST-INCOME-NET> 2,609,000
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,932,000
<INCOME-PRETAX> 799,000
<INCOME-PRE-EXTRAORDINARY> 525,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 525,000
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> 3.82
<LOANS-NON> 1,363,000
<LOANS-PAST> 284,000
<LOANS-TROUBLED> 1,647,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,092,000
<CHARGE-OFFS> 376,000
<RECOVERIES> 75,000
<ALLOWANCE-CLOSE> 1,931,000
<ALLOWANCE-DOMESTIC> 1,931,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 98,000
</TABLE>
